“It is not the strongest of the species that survives,not the most intelligent that survives. It is the one that is the most adaptable to change.” Charles Darwin
Triari Consulting Three Layer Model for open banking
We have previously proposed a three layered model that defines providers' approaches to open banking:
Pure compliance: where an ASPSP just opens up access on the basis of PSD2. Due to the lack of contracts etc there is no commercial upside to this for the ASPSPs. Hence the lack of progress here.
Walled garden or gated community: Here the ASPSP opens up, but only to a group of curated TPP's. This is currently in vogue, prime examples being Nordea and Starling but is likely to only work in the short term like AOL’s early response to the internet.
In the first stage of this financial sector companies, identifying that the way to monetise the opportunities from PSD2 and GDPR is to become a TPP. Even in order to monetise the data they hold on their own customers as ASPSP. Given the limited functionality of the standards, this has to be done using access methods beyond the existing standards. A prime example of this is HSBC.
Ultimately, in order to really leverage the benefits of open access, there will be a move to schemes. This is because some degree of predictability and reliability in the relationship needs to be agreed by the parties in order for open access to truly work.
The challenge for providers where payments are not core
This article explores how this model can be extended to a specific example of ASPSPs that provide payments accounts almost incidentally rather than as a major line of business, and how they could adapt to the new realities, in particular a specific instance of this; UK building societies
“It is not the strongest of the species that survives,not the most intelligent that survives. It is the one that is the most adaptable to change.”
In UK it is increasingly hard to envisage providing payments accounts provision as a profit centre in itself for niche incidental players:
Costs are ever increasing given the level of investment required. For example, regarding PSD2, GDPR, New payments Architecture (NPA), and the increasing costs of moving to real time payments.
Relatedly the cost of AML/CTF/fraud compliance is becoming increasingly high. Especially when this needs to be done in real-time, when the payments might be initiated by a third party.
Free if in credit banking (FIIC): In the UK consumers are used to FIIC. This makes it very hard to make a profit in payments provision in itself.
Especially given that it is becoming clear that, in order to gain access to the data within payments transactions that might be of value, is actually easier as a TPP than as an ASPSP.
This will give rise to the doubtless unintended consequence that payments provision will become increasingly concentrated in the hands of fewer major players that can still make money even as they become payments rail providers with little ability to differentiate their services or to connect with the consumer.
Hence some smaller players, for example building societies like Norwich and Peterborough, are very sensibly considering existing payments.
Exploiting open banking in this changed environment
But, as the complaints pages of the Sunday papers have shown, this is potentially perceived as sub-optimal for the customer. Say a customer wanted to have its current account with a building society and then finds difficulty gaining access to such an account this can create reputational damage.
A more sophisticated approach would be to find a building society that wants to stay in payments, or other brand perceived as ethically better than the banks, and put in place an agreement so that the in payments account customers can move to this new player, while ensuring bespoke functional APIs from the smaller building society so that as much as possible the payments service can be provided to customers as an integrated service, even though it now runs on the payment rails of the larger player. This strategy would need to involve an integrated plan to:
Provide a tailored current account switching service so the customers that want to can switch to the accounts to new payments account provider.
Ensure that a sophisticated bespoke API offering is in place so the small building society can retain the customer relationship via an app while the payment rails are provided by the larger payments account provider. Which will in turn require:
Legal agreements, including SLA's, for both the transition period and business as usual;
Bespoke APIs services that will be provided on time for the transition, and maintained so that the service evolves as requirements develop.
It is likely that the benefits of such an approach would be greater if a group of building societies worked together to increase the economies of scale.
We have been exploring this idea with some incidental providers of payments services to customers that are contemplating a strategic shift to take account of the changed environment created by the major changes in the payments landscape. Both in terms of strategy as well as how best to support this with well-architected IT services that combine strategic benefit, regulatory compliance, and operational practicality.
If want to discuss the ideas in this paper please e-mail email@example.com, call +44(0)755 442 3099, or contact us via our website at www.triari.co.uk.